10 healthcare stocks to watch
Covid-19 has had a dramatic effect on the healthcare industry – while some are fighting to stay healthy amid market instability, others are thriving. Discover the top 10 healthcare stocks to watch, and how you can trade them.
Healthcare stocks: what you need to know
Healthcare stocks are the companies involved in providing medical services. The healthcare sector makes up one of the largest portions of the global economy, with a range of different categories of businesses, including:
- Pharmaceutical companies: these are the companies involved in producing over-the-counter and prescription drugs. Often called ‘big pharma’, these companies spend large portions of their income on research and development
- Healthcare services: these companies include the hospitals and clinics, which are the backbone of any healthcare system. Although many countries choose to run a public healthcare system, private healthcare companies are available for investment. Insurance companies are also included in this sector
- Medical device stocks: these are the companies involved in the creation and distribution of everything from artificial joints to blood pressure monitors. The products of these companies are usually always in demand
- Biotechnology: the companies in this section of healthcare are involved in research and development of medicines and technologies derived from living organisms. They are involved in providing treatment for chronic and terminal ailments
What moves the prices of healthcare stocks?
The prices of healthcare stocks, like most assets, are moved by the forces of supply and demand. There are a broad range of factors that cause share prices to change, including news and economic data.
Most recently, the Covid-19 crisis has been the largest driving force behind healthcare stock prices. Some companies have benefitted from the increased demand for healthcare products and services, but others have suffered from declining patient treatment amid lockdown measures.
Broadly speaking, the other factors that affect healthcare stocks are:
- Demographics: as people live longer, and the population grows, there is an increased reliance on medical services. The increased demand for drugs and other products can have a positive impact on share prices
- Fiscal policy: the relationship between government spending and private companies is an important factor when assessing healthcare stocks. Policies that impact the taxation of companies, and the amount companies can charge for their drugs, can greatly impact profit margins
- Research and development: for manufacturers, the introduction of new products has the largest impact on their share price. Prior to the drug being released, the outcome of clinical trials and any related news will affect the company’s share price
- Regulation: any regulation that could restrict the output of manufacturing companies or cause issues in the service delivery could play out negatively across the company share prices
How to take a position on healthcare stocks
There are two ways that you can get exposure to healthcare stocks: investing and trading.
When you invest in healthcare stocks, you’ll be buying shares in a company or a healthcare exchange traded fund (ETF) outright. This is done in the hope that they increase in price, and you can sell them at a later date for a profit. Along with the physical shares in the company, you would receive shareholder rights and any dividends that are paid.
Learn more about investing with a share dealing account
If you decide to trade healthcare stocks instead, you could speculate on shares and ETFs, whether they are increasing or decreasing in value. This means that you can focus on shorter-term market movements that might occur when news and regulatory announcements hit the market. You can trade on healthcare stocks via derivative products, such as spread bets and CFDs.
Both products are leveraged, so you’d only need to put down a small initial deposit to gain full market exposure. While leverage can potentially make your money go a lot further, it comes with increased risks.
Learn how to manage your risk
Top 10 healthcare stocks to watch
- Johnson & Johnson (JNJ) - $397.12 billion
- UnitedHealth Group Inc (UNH) - $337.47 billion
- Merck & Co Inc (MRK) - $202.86 billion
- Abbott Laboratories (ABT) - $ 201.46 billion
- Pfizer Inc (PFE) - $196.71 billion
- Novartis (NOVN) - $194.70 billion
- AbbVie Inc (ABBV) - $173.65 billion
- Novo Nordisk (NVO) - $160.31 billion
- Medtronic plc (MDT) - $150.06 billion
- Eli Lilly and Company (LLY) - $134.49 billion
The healthcare sector is huge, with a large number of stocks to choose from, and plenty of opportunities for going long and short. Take a look at the top ten healthcare stocks by market capitalisation. All data for market capitalisations was collected on 20 November 2020.
Johnson & Johnson (JNJ) - $397.12 billion
Johnson & Johnson (JNJ) is the world’s largest healthcare company. It’s a multinational pharmaceutical and medical devices manufacturer based in the US, which consists of 250 companies – collectively called the ‘Johnson & Johnson family of companies’.
It’s currently part of the group of stocks racing to produce Covid-19 vaccines, as well as providing support to hospitals and patients. However, the pandemic has caused a net decline in international over-the-counter products and medical device sales, which has negatively impacted JNJ throughout 2020.
Johnson & Johnson’s third quarter (Q3) announcement in September 2020 showed a 1.7% increase compared to the previous year’s quarter – at $21.082 billion. However, looking at a 12-month period, the revenue of $80.85 billion in September was down by 1.04% year-over-year. It marks the first year in three years that JNJ have experienced an annual revenue decline.
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UnitedHealth Group Inc (UNH) - $337.47 billion
UnitedHealth Group (UNH) is a health and wellbeing company that provides products and insurance services to more than 50 million patients in the US, and over 5 million worldwide.
The company has performed amazingly well despite the pandemic, as it was able to continue a large part of its operations by switching in person client care to virtual consultations. From January to November 2020, UnitedHealth Group shares had gained 20% and reached an all-time high of $356 on 16 November.
In the lead up to the US election, shares of UNH experienced wild price swings in anticipation that a victory for Joe Biden could increase drug pricing legislation. However, the sector stabilised following the results, as a Democratic president with a Republican Senate is unlikely to be able to push through any such legislation. This could set the stage for the company to see further growth in the future.
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Merck & Co Inc (MRK) - $202.46 billion
Merck & Co Inc (MRK) is a US-based pharmaceutical company, established in 1891 as a subsidiary of the Germany company Merck.
Merck is another company that has been involved in the development of coronavirus vaccines. It acquired the private biotech firm Themis in June 2020, and teamed up with the International AIDS Vaccine Initiative to assist with its experimental Covid-19 vaccine trials. Merck has also received positive attention for its development of a cancer drug called Keytruda, which could be the company’s most important product going forward.
In its Q3 2020 earnings announcement, Merck had had a 15% increase in earnings compared to the previous year – although sales only increased by 1% to $12.6 billion. Following the announcement, Merck’s share price experienced significant volatility – tumbling by as much as 11% on 11 November.
But, in a regulatory filing on 16 November, Warren Buffett’s Berkshire Hathaway disclosed it had more than $1.8 billion invested in MRK. The news caused the share price to rise from 81.42 to 83.48 two days later. It’s likely Buffett’s increasing share of pharmaceutical companies in his portfolio is due to the coronavirus pandemic and focus on the healthcare industry.
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Abbott Laboratories (ABT) - $201.46 billion
Abbott Laboratories (ABT) is an American healthcare company, which is focused on research-based drugs, medical devices and pharmaceuticals. It is considered a world leader in all of its core businesses, but is most famous for developing the first HIV blood screening test in 1985. Abbott Labs later spun off its pharmaceutical arm AbbVie, which is also one of the largest global healthcare stocks.
The company has paid its shareholders dividends every year since 1924 and has increased these pay-outs for 48 consecutive years, making it a member of the elite group of stocks known as Dividend Aristocrats.
Abbott Laboratories remained stable despite Covid-19. By November 2020, ABT stock had gained over 37% over the last 12 months. Over the same period, the S&P 500 had risen by 12.31%.
The future outlook for Abbott Labs is predicted to be strong, with an expected profit growth of 76% over the next couple of years, which could feed into a higher share valuation. However, it’s likely this outlook has already been factored into its share price, which a lot of analysts now believe is overpriced.
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Pfizer Inc (PFE) - $196.71 billion
Pfizer Inc (PFE) is a US-based biopharmaceutical company that discovers, develops and delivers medicines, vaccinations and other healthcare products.
Pfizer was the first company to announce its coronavirus vaccine was 90% successful on 9 November. PFE stock climbed 11%, while markets around the world rocketed – the FTSE jumped by 5%, while the Dow Jones jumped 5.6% on opening.
However, a week later Moderna Inc released preliminary results that showed a 94.5% efficiency rate – causing PFE stock to fall again. Pfizer has since stated its vaccine is 95% successful. The other advantage Pfizer may have over its competitors is its likely to be cheaper, which could make a difference when it comes to vaccinating such large numbers of people.
Pfizer was another beneficiary of the ‘Buffett effect’ – its share price jumped 2% on Monday 16 November when it was announced Warren Buffett had invested $136 million in the company.
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Novartis AG (NOVN) - $194.70 billion
Novartis AG (NOVN) was founded in Switzerland in 1996, as a healthcare company focused on drug development. Novartis was listed on the SIX Swiss Exchange in 1996 at $23.26.
Coronavirus has obviously created a significant number of challenges that have impacted Novartis’s 2020 targets. However, the company’s CEO Vas Narasimhan said that they’re confident the healthcare industry has learned from mistakes made in the first wave, including the postponement of treatment, which hurt sales of Novartis drugs.
Despite these challenges, Novartis reported an increase of 8% in core net income in its Q3 results, up to $3.47 billion – this came in above estimates of $3.32 billion. The company’s annual net income has fallen from $9.8 billion to $7.1 billion. Meanwhile, sales have remained reasonably flat over the past ten years – ranging from $51.6 billion in 2010 to $49.6 billion over the last 12 months.
The company’s shares did fall by about 3.7% following the earnings announcement on 27 October 2020. However, management has been looking to streamline the company, trimming down and selling off areas of its business – this could lead to future profitability across a range of its core markets.
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AbbVie Inc (ABBV) - $173.65 billion
AbbVie Inc (ABBV) was created after Abbott Laboratories split into two publicly traded companies. It launched with a handful of Abbott Labs’ best-selling drugs and quickly gained market share. It now has a market capitalisation of more than $173.65 billion.
In early September 2020, US Rep. Carolyn Maloney announced plans to subpoena AbbVie in an investigation into drug prices – causing ABBV stock to fall 3.7% intra-day and reach a nearly seven-month low of 79.11. AbbVie had been accused of obstructing the committee for 18 months, a charge the company refuted.
AbbVie was particularly scrutinised by President Elect Joe Biden who stated ‘The pharmaceutical giant AbbVie received a $1.3 billion tax handout, announced $10 billion worth of buybacks, then increased prices for more than ten of its products.’
As a Democratic president and Republican Senate majority became increasingly likely, the biopharma industry was boosted on hopes of fewer drug pricing reforms. AbbVie stock increased by 14.4% in the week following the election from 87.97 to 98.86.
AbbVie was also one of the pharmaceutical stocks Warren Buffett added to his holdings disclosed on Monday 16 November 2020 – the stake is worth approximately $1.8 billion. The news caused an intra-day increase of 0.6%.
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Novo Nordisk (NVO) - $160.31 billion
Novo Nordisk (NVO) is a Danish multinational pharmaceutical company that manufactures products, including diabetes care medication and hormone replacement therapies. It is one of the world’s largest suppliers of insulin.
Novo Nordisk’s earnings per share (EPS) grew 4.6% per year between 2017 and 2020, which has pushed its share price steadily higher – with an average annual share price increase of 10%.
Novo still generates around 85% of its revenue from diabetes care, but over recent years, the focus has shifted from insulin to a new diabetes drugs called GLP-1. The rise in its semiglutide drug platform – known as Ozempic – has helped push revenue higher in 2020, despite Covid-19.
Novo made huge progress on its aspirations in both diabetes and obesity medications, which saw sales grow by 8% over the first half of 2020 for obesity care, and an overall sales increase of 30%.
In 2021, Novo is expected to commence phase-three testing of its new obesity drug that aims to aid in weight loss. There has been a lot of hype about the injection results in the first two stages of the trail, after it won FDA approval for use in lowering the risk of cardiovascular events in patients with Type 2 diabetes. This could prove a driving force behind Novo’s future share price movements.
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Medtronic plc (MDT) - $150.06 billion
Medtronic (MDT) is one of the world’s largest medical technology and services companies, providing everything from cardiac devices to diabetes monitors to more than 70 million global patients. It was created in early 2015 out of a merger between Medtronic and Covidien.
Like most segments of the healthcare industry, Covid-19 has had a drastic impact on the growth prospects of medi-tech companies. However, this hasn’t stopped Medtronic making seven acquisitions in the first ten months of 2020 – largely other medi-tech stocks and artificial intelligence firms. MDT stock had increased by 13.75% in the six months to November 2020 – although it was still down -0.84% year-to-date.
In October 2020, Medtronic agreed to pay $8.1 million to resolve allegations that it was paying kickbacks to a South Dakota neurosurgeon to use their products. Despite the bribery allegations, Medtronic has been recognised as one of the world’s leading companies for sustainability with its inclusion in the Dow Jones Sustainability North America Index (DJSI North America).
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Eli Lilly and Company (LLY) - $134.49 billion
Eli Lilly and Company (LLY) is a US pharmaceutical company, with operations in more than 18 countries and sales in over 125 countries.
While the S&P 500 has gained 12.31% in the last 12 months, Eli Lilly has risen by 27.12%, and its revenue for the first two quarters has grown by 1% year-on-year. This is largely due to the coronavirus pandemic, which has seen increased demand for the company’s treatments.
However, it hasn’t been all positive news for Eli Lilly. While it’s first two quarters saw positive earnings, it’s third quarter was weaker than expected. It had a net income of $1.208 billion, or $1.33 a share, which was down from $1.254 billion, or $1.37 a share, in the previous year’s Q3 period. On the day of the earnings announcement, 27 October 2020, shares of LLY fell 4% in premarket trade.
Management said they remained confident in the strength of Eli Lilly’s underlying business and believed it would continue to deliver success over the long term. In November 2020, Eli Lilly’s antibody treatment for Covid-19 was given emergency approval by the US FDA, which boosted the stock by 0.67% in four days. It’s likely the use of this treatment could provide longer-term fuel to market enthusiasm around the stock.
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What to bear in mind before trading healthcare stocks
The healthcare industry is currently experiencing a lot of volatility. The impacts of Covid-19 have both increased demand for research and development around treatments, as well as lowered the demand for other services.
Healthcare stocks in general have underperformed the broader market over the past 12 months. The Health Care Select Sector SPDR ETF (XLV) has had an average total return of 16.8% over the past 12 months, just below the Russell 1000's total return of 19.2%. But it has outperformed the S&P 500, which only gained by 12.31%.
Before you take a position on a healthcare stock, it’s important to do your research and look at how they’ve performed throughout 2020. Some of the stocks on our list have outperformed the market, while others have suffered due to the pandemic and general bear market throughout the year.
Depending on your goals – whether you’re interested in long- or short-term market movements – you’ll need to look at lasting sustainability of the company’s share price. If it’s overvalued, you might consider taking a short position on it, in anticipation of a stock market correction. And if it’s undervalued, you might want to go long to benefit from long-term growth.
Healthcare stocks summed up
- Healthcare stocks are all the companies that are involved in providing medical services
- The healthcare sector makes up one of the largest portions of the global economy
- Healthcare stocks fall into four categories: pharmaceutical, healthcare services, medical devices and biotechnology
- There are range of factors that cause healthcare share prices to change, including demographics, fiscal policy, research and development, and regulation
- Covid-19 has been providing fuel for growth for some healthcare companies, while stagnating the growth of others
- Investing in healthcare stocks enables you to look at longer-term market movements
- Trading healthcare stocks enables you to look at interesting short-term volatility that could play out across the share prices of the companies
- It is important to keep an eye on the latest industry trends and the forecast for healthcare stocks
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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